IR35 off-payroll working changes explained
In 1999 the government voiced its concern that people were setting up limited companies to work through despite that they worked in the manner of a traditional employee. This meant they were paying a significantly lower level of tax and NICs due to their service structure.
They did this by paying themselves an exceptionally low wage (putting most of the money into profits for the limited company) and then taking out a large sum in the form of a dividend once a year. This meant that, due to the low wage, their monthly tax, PAYE and NICs were very low whilst their actual income was high due to the yearly dividend from the company.
The IR35 rules are designed to prevent this by forcing people who were using this set up, but are deemed to be a permanent employee, to follow certain rules.
New IR35 changes are coming into effect in April 2021; and you need to understand it ASAP unless you want to risk enormous fines. The new changes will remove the responsibility of determining employment from the contractor to the company through which they are working.
For example, Joe is a contractor who owns (and works through) his limited company. Other large companies employ Joe to work for them through his limited company. These companies will have the responsibility of deciding whether Joe should be treated as a permanent employee or not and therefore whether he falls under the IR35 rules. If they decide that Joe falls under these rules, they will take tax, NIC, PAYE and pension deductions from his wage. Previously, Joe would have been responsible for making this decision. By taking away the decision from the contractor and threatening companies with large fines for a poor decision, HMRC hopes that people who should previously have followed IR35 will now have no choice but to.
How do I know if IR35 will apply to me?
In order to understand whether you may be required to follow IR35 rules, you need to ask yourself some questions.
Principle tests of employment
1) Control - Does the client control what, how and where the work is completed?
2) Substitution - Is it a personal service that you must complete or could someone else be sent in your place?
3) Mutuality of Obligation - Must the employer offer you work and are you obligated to accept it?
In order to not class under the IR35 rules, you will need to demonstrate that these conditions don't apply.
Another way of working out whether you could be considered as a permanent employee is answering these questions:
- Does the company supply your equipment to do your job?
- Do you work full time?
- Are the specific tasks of your job not clearly defined?
- Do you work for a medium or large size company and work with other full time, permanent employees as part of their team?
If the answer is yes to some or all of these questions, you are likely to be considered as a permanent employee and required to follow IR35 rules. It is important to note, however, that IR35 assessment works on a case-by-case basis and, even if you have answered no to all these questions, you may still fall under IR35 rules.
It is important to prepare for these changes because up to 50% of the construction industry work through this set up, and could therefore be subjected to the new IR35 rules.
Another thing worth noting is that the IR35 rules do not apply to small companies so they won't be affected.
How will the rules work in real life?
Before starting your contract, the end-client must make an employment status decision. They may use tools such as CEST (which has unfortunately been proven to be deficient) and expert third party or other methods. You will be presented with a Status Determination Statement before starting the work which will show whether or not you fall under the IR35 rules. The fee payer will also be notified of the decision as they will be required to make the appropriate tax, NIC and pension contributions if you do need to follow the IR35 rules.
When does it start?
The planned start date is 6th April 2021; however, it was originally supposed to start on 6th April 2020 but was delayed due to the coronavirus pandemic. For more information on schemes to help you and your business in the coronavirus pandemic click here.
What if I don't agree with my employment status decision?
You can appeal your employment status decision if you do not agree with it. Appeals can be made through a client-led disagreement process. The client will have 45 days to respond with either a change to the determination and new statement or an explanation of their original decision.
If I am deemed to be an “employee”, will I get employment rights such as sick pay and holiday?
No. If your contract is deemed as IR35, you will be taxed as an employee but receive none of the benefits associated with permanent employment. This is considered one of the most unfair aspects of the IR35 policy.
What if I have multiple contracts with different clients?
IR35 rules apply to a contract, not a person. This means that you could have one of your contracts found to lie under IR35 rules whilst others don't. You will only need to follow IR35 rules in relation to contracts where you are deemed to be treated as a permanent employee.
How will I get paid if I fall under IR35 rules?
Some cases may emerge where you will only be offered a certain contract if you become a PAYE worker as it will take away their responsibility of determining your position in relation to IR35. Others will allow you to take out the role as a limited company contractor but, if you fall under IR35 rules then they will take the appropriate deductions from your turnover.
Under the new IR35 rules, contractors who are inside the IR35 rules can no longer claim the 5% administration allowance.
Is there any way around the new IR35 rules?
No. Whilst you can appeal decisions, there is no definitive criteria that defines whether you should be IR35 compliant. This means that not following the rules when there is some chance that you should be risks huge fines from HMRC.
To summarise; unless you have some concrete evidence as to why you do not fall under the IR35 rules, you should be compliant and clear with your work.
If you have any more questions about the new IR35 rules, You Know It Makes Sense to give us a call today!
Makes Sense Accountants